Will SEC Crossfire Affect Chinese Companies Trading in the U.S.?

In the past it would have been easy to cognitively file these charges as just another battle in the ongoing economic war between the U.S. and China. But with the global economy lagging and international participation in the markets increasingly important, officials correctly recognize this as an issue that requires decisive action or it will continue to propagate legal conflict, uncertainty, and financial losses due to fraud.

The fundamental problem, according to U.S. bankers in Hong Kong quoted by the Financial Times, is that “this is an issue that can only be dealt with at the government to government level,” and “it looks like that diplomatic process may have broken down.”

There is hope that a way to produce the paperwork for U.S. authorities will be found, but as the investing adage goes, hope is never a good strategy. “For Chinese companies, a US listing used to be a badge of honour,” says a leading Hong Kong lawyer quoted by the FT, “but the regulatory burden, tax concerns and the poor performance of shares means they are no longer interested.”

The short answer is: yes. Several major Chinese stocks are down in morning trading on December 4 as news circulates and uncertainty builds. Shares of Baidu and Sina are down over 5 percent, with Sina hitting new 52-week lows. Qihoo 360, coming off of fresh 52-week highs on Monday, dropped over 3 percent.

While something of a recovery by the end of the day or in the coming week wouldn’t be surprising, the uncertainty caused by the legal situation will weigh on the stocks. More bad news could easily catalyze another sell-off.